Global dairy demand will absorb rising milk production.

Milk and feed prices appear set to underpin a strong margin year for most U.S. dairy producers, Rabobank’s Tim Hunt said today at World Ag Expo in Tulare, Calif.

With the strength in the global milk powder market, Hunt expects "Class IV prices to remain the driver of dairy prices." He pegs them at least at $18.40 per cwt. by year’s end.

Hunt is a Global Dairy Strategist in the international bank’s Food and Agribusiness Advisory unit.

He gave six reasons why he believes milk prices will not crash in 2014:

1. The world economy isn’t growing fast enough to crash.
2. We’re entering the first half of 2014 with less stock than usual.
3. China will take a large share of the additional surplus from rising milk production.
4. Non-China buyers have been on dairy-buying "diets" for 12 months and are keen to refill their pipelines.
5. The economies in those regions, such as Vietnam and the Philippines, are improving, so demand is rising.
6. The apparent size of the "wave of milk" from increasing production reflects recovery from 2013’s weak first half. Growth will be less strong in the second half of this year.

In the U.S., milk output is expected to rise 2% in the first half of 2014, he said. If it grows beyond that, there’s a downward risk that could put more product on the market and likely also increase the discount of U.S. prices to international levels.

Milk production is rising again in export regions, Hunt said, but lack of stock and improvement in local consumption has curtailed export supply. Meanwhile China and Russia are buying strongly.

"China will be central to determining 2014 market pricing," Hunt said. One potential upside to the market is that Chinese production could fall further this year.

International prices have stayed at exceptionally strong levels to ration demand. U.S. prices have received support from tight international markets and firming local demand.

While many factors point to strong milk production in dairy exporting regions in the coming 12 months, Hunt expects a few drags.

In the U.S.:
• U.S. dairies may be more preoccupied with rebuilding equity.
• There’s uncertainty over immigration reform.
• There will be less easy credit with lenders.
• Dairies are more interested in buying land to grow feed rather than building barns or acquiring more cows.

Milk production in the European Union will drop as it phases out quotas by 2015.